The importance of following a trading plan


Most forex traders tend to spend a lot of time researching into finding an edge with a forex trading system or strategy. While it is essential to find a system that suites ones trading personality, this comes at the cost of ignoring the other important elements in trading which is planning.
By giving undue importance to a trading strategy, a trader often ends up compromising on working within the framework of a trading plan. A forex trading plan is just as essential as a forex trading system as it helps to prepare a trader on the minor yet critical aspects such as position sizing and risk management.

Building a trade plan

Traders might have heard the phrase, “Plan your trade and trade according to your plan”. Although this sounds simple, practically this philosophy is harder to implement if there are no ground rules laid out. So how does one go about building a disciplined trading plan? The following tips should help guide the reader as it lays the basic groundwork for building their trade plan.

1. Balance your technical and fundamental analysis

Most traders end up either paying too much attention to technical analysis, compromising on the fundamentals or vice versa. It is essential to find a balance between the two. While one might argue that one field of analysis trumps the other, the truth is far from it. To put it bluntly, if you want to be successful trading the forex markets, then you need to have a grasp of both the fundamentals and technical aspects of the instrument or asset that you are trading.
Sure, EURUSD might be falling and you might see an opportunity to short the currency based on your trading system. But if you do not know the reason why the Euro is falling against the US Dollar, it can make you vulnerable to impulsive trading decisions.

2. Learn the bigger picture

Perhaps the best way to illustrate this point is to take the example of a person building a house. Would you just start to build a home on a vacant plot of land without considering other aspects such as how deep you need to lay the foundations or get acclimatized to your surroundings?

The same holds true with trading the forex markets as well.

When we say “learn the bigger picture” we are simply referring to gaining an understanding of what’s happening on the longer time frames, such as weekly, monthly or even daily depending on your preferred time frame for trading.

Your trading system might signal a long position, but what if the higher time frame points to a mere bounce or a correction in the major trend? By shutting yourself off from the bigger perspective, the odds of trading against the trend increases remarkably and thus gives rise to potential stop outs or even margin calls.

3. Stick to familiar territory

While you might get tempted to try out your trading system on an exotic currency pair, it is not wise to do so. Sticking to the assets or instruments that you are familiar with gives you a better edge, especially when you take into considering the first point mentioned in this article, which is to balance out between technical and fundamental analysis of the currency pairs of your choice.
Sure, trading the USDMXN might look tempting, but if you do not know what the economic indicators and monetary policies of the respective economies are, your trade positions are likely to be very vulnerable.
In this essence, it is important to focus on just a handful of currency pairs and their respective economies, which when combined with the fundamental and technical view of those currencies, gives you a better chance to manage your risks.
The above three pointers are by no means the be all and end all towards building a trading plan, but in essence points to the most important basic foundations towards building a more sophisticated approach to trading the forex or financial markets. A trading plan not only helps to maximize the potential of your trading strategy, it also helps the trader to be more disciplined in their approach and thus allows traders the advantage of being able to better manage their trades and risk.

By John Benjamin | Analyst at Orbex

Swing trading rules to follow (part 1)

amusement park ride
In my previous article, I introduced some general ideas about swing trading. This article will discuss some of the most common swing trading rules that should be followed. Again, there does not have to be many of them, but six or eight would be necessary to avoid pitfalls that await a trader using this type of trading method. Let’s briefly look at three first rules in this article and three more in the next one. [Read more…]

Introduction to Swing Trading

amusement park ride
Traders can be grouped into a small number of categories: day traders, swing traders and trend traders. These groups also have subgroups. A person can be a day trader and a scalper or a trend trader and a fundamental trader. The aim of this article is to look at swing trading, and discuss when to use it, when to place stops and when to take profits. So, here we go! [Read more…]

Day Trading Rules (Part 2)

sunrise bridge

I started writing on day trading rules in my previous article. We looked through three important rules last time: trading with a plan, using limit orders, and keeping a trading journal. This article will cover three more rules. Of course, you can always add more, but the more rules you have the more difficult it becomes to follow them. Keep it simple and just follow the most important rules. So, let’s look at the last three rules. [Read more…]

Day Trading Rules (Part 1)

sunrise over bridge

One of the most common approaches to trading currencies and other securities is day trading. A day trader is a person who opens and closes his trading positions within the period of 24 hours. He may keep his position open a few hours or only a few minutes, but he will close them before the market closes, or in the case of Forex market, before the New York close (which marks the end of American session). Like every good trader, a good day trader will always trade by some rules. Let’s look at some of them in this article and the next one. [Read more…]